Chapter

Intersectoral Complementarities and Coordination Failures

Pranab Bardhan and Christopher Udry

in Development Microeconomics

Published in print May 1999 | ISBN: 9780198773719
Published online November 2003 | e-ISBN: 9780191595929 | DOI: http://dx.doi.org/10.1093/0198773714.003.0016
 Intersectoral Complementarities and Coordination Failures

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This chapter is about models that show how intersectoral complementarities in the economy generate multiple equilibria, highlighting the policy problem of moving away from a ‘low‐level equilibrium trap’ by coordinating expectations. In the first model, we present a situation in which firms that invest in a modern technology with increasing returns need to share in the cost of essential infrastructure. There may, then, be an equilibrium with coordination failure in which the infrastructure is not built for fear of not enough firms choosing to industrialize, and the fact that infrastructure is not built ensures that there is no industrialization. In another model, the efficiency of the manufacturing sector can be enhanced by specialized inputs. This model illustrates how the economy may get stuck in an equilibrium in which a low degree of input specialization makes for an inefficient modern sector and the economy specializes in goods with low‐productivity techniques that do not require a wide variety of inputs.

Keywords: coordination failure; efficiency; increasing returns; industrialization; infrastructure; input specialization; intersectoral complementarities; low productivity; manufacturing; multiple equilibria

Chapter.  4192 words.  Illustrated.

Subjects: Economic Development and Growth

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